Freek Vermeulen | How Would You Define a “Great Company?”

by InnoTown on 08/23/2013

Last week, I was interviewed by a journalist from Korea’s Maeil BusinessNewspaper (the local equivalent of the Financial Times). After quite a lengthy discussion, he ended by asking, “How would you define a ‘great company’?” I thought it was a bit of a lame question—but my answer to him seemed at least as lame. I babbled that (1) I would judge a company by its performance (a long-term record of above-average profits) and (2) employees should really enjoy being part of that organization.

At the time I didn’t think it was the sharpest exchange of the day, but when I considered it for a while afterward, I started to really like the question—and even to appreciate my answer to it! This might be my memory playing dirty tricks on me—in a feeble attempt to protect my self-image—but if asked today, I would likely give more or less the same description.

I think most would agree that you cannot call any firm a great company when it is habitually underperforming. But great financial performance is not enough. At the end of the day, an organization is nothing more than a collection of individuals working (more or less) together. If the people who constitute the organization do not enjoy being part of it, I have a hard time seeing it as a great company.

I realize some of you might prefer to bring customer satisfaction, if not other stakeholders, into the mix. Yet, to me, employee satisfaction is the pivotal point of departure. The legendary founder of Southwest Airlines,Herb Kelleher, used to proclaim that employees (“not customers or shareholders”) were most dear to him. That’s because he figured, if you have happy employees, they will make your customers happy. And happy customers will come back, which will eventually make your shareholders happy too (and, not coincidentally, Southwest had a generous profit-sharing scheme, basically turning employees into shareholders). Southwest has been outperforming its peers for decades.

Yet, most of us—investors, included—continue to underestimate the power of employee satisfaction. Alex Edmans, my new colleague at the London Business School, recentlypublished a study that examined the effect on future stock returns of a company making it onto Fortune’s list of “100 Best Companies to Work For.” He found that such a company subsequently generated 3.5 percent higher stock returns per year than its peers. This finding suggests two things: (1) this employee satisfaction thing really works; having happy employees eventually culminates into hard stock returns; but also (2) that the stock market still undervalues its importance. The stock market habitually fails to anticipate these extra earnings, owing to employee satisfaction (even though the list of 100 Best Companies To Work For is public knowledge).

There is money to be made from employee satisfaction. Let’s all get rich and happy, but not necessarily in that order.